Sunday, July 31, 2005

The Lost Weekend

Whatever it is I've had the last couple of days, you don't want to get. I won't go into the details, but the result has been a lost weekend of sleep mixed with antibiotics, ear drops and codeine-laced cough syrup.

But why I even bring this up is my experience at the local walk-in medical clinic.

After a few days of feeling increasingly lousy, I dragged myself over there Friday morning, not thinking myself sick enough to bother my own doctor 30 miles away. I figured the walk-in clinic doctor would prescribe an antibiotic and some ear drops and be done with it.

Well, the walk-in clinic “doctor” listened to my chest—triggering a hacking cough; looked in my ears—triggering a painful ache in my right ear; asked me a few questions…and then told me to try an over-the-counter throat lozenge (I am not making this up) called Cold-eeze.

If you don’t recognize Cold-eeze—the brand name of zinc-based cold lozenges—you weren’t around back in 1999 when the maker, Quigley Corporation, settled FTC charges that the company made unsubstantiated claims about Cold-eeze’s ability to prevent colds.

But the controversy didn’t end there: a nasal spray version of Cold-eeze triggered lawsuits against Quigley for causing an intense burning sensation in the nostrils and damage to the sense of smell (“anosmia”)—and was discontinued by Quigley last year. (A friend of mine who used the spray actually experienced this, and it is not at all a minor thing).

So when I heard the walk-in clinic doctor say “Cold-eeze” and tell me that “according the literature” it works “although we don’t know why,” I almost fell off the examining table.

But I didn’t; nor did I say anything about the history of Cold-eeze and Quigley. I just got out of there as fast as possible and made an appointment with my real doctor.

When she walked into the examining room and heard me cough, she said, “that sounds bad” before she even picked up a stethoscope. And when she looked in my right ear—the one the walk-in clinic “doctor” had examined without comment, she said “wow—that’s really bad.”

Hence the antibiotics and codeine-laced cough syrup and ear drops, all of which appear to be precisely what I needed.

Next time I go straight to the real doctor.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Thursday, July 28, 2005

Would You Believe…A Chinese-Led Reflation?

Consider the following tidbit that came in via a morning research compilation. I include it as sent, complete with misspellings and abbreviations.

Chinese 1Q urban employees salaries up 14.6% y/y, avg salary up 13.2% y/y

I do not know from whence the data came, nor do I know whether the 14.6% year-over-year increase in urban Chinese labor costs was “worse than expected” or “better than expected” or “in-line” with economist’s expectations.

But I do know that the “Chinese labor arbitrage” of which the bond bulls speak so approvingly continues apace…and while it is having a salutary effect on Wal-Mart’s cost of goods sold and Alan Greenspan’s CPI number, it is likewise having an inflationary effect on the Chinese labor market that would make a Peruvian Central Banker resign from his post, dig out the gold bullion from beneath his wine cellar and set sail for Bimini.

Only recently, fears of “a Chinese-led slowdown” caused Doomsday-Economist Steve Roach to jump to defect to the Bill Gross-led, Chinese-Labor-Arbitrage-Is-Deflationary side of the bond market food fight, about 50 basis points ago on the two-year treasury note (see "Even Armageddonists Need An Office" from June).

Yet today we read that the average Chinese urban salary—think about this for a minute—rose 14.6% in the first quarter.

I’m no math whiz, but I do know that 14.6% rounds up to 15%...and 15% a year doubles every five years.

In the words of Maxwell Smart, Agent 86 of CONTROL (why that show isn’t on cable TV somewhere in this great country of ours 24 hours a day is beyond me): “Would you believe, a Chinese-led reflation?”

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Wednesday, July 27, 2005

Goodbye, Ruby Tuesday

You’d think they could get the nachos right, at the very least.

I took our younger daughter out to dinner last night, just the two of us, for a little of the father/daughter time that I enjoy more than anything else in this world...but which probably causes her to think of the old Jack Nicholson line: “I’d rather stick needles in my eyes.”

But go we did, bypassing the local Chile’s where we went last summer for our bonding dinner because, as she reminded me, “it was pretty bad,” and heading for the Ruby Tuesday a few miles further down Route One.

I am moderately familiar with Ruby Tuesday, which goes by the ticker "RI" and has had a rough year or two after a spectacular turnaround. I went in with no expectations, positive or negative...just hungry.

I came out still hungry and looking for something to get the bad taste out of my mouth. The food could have been worse, I suppose. But not much worse.

The salad bar for which Ruby Tuesday is widely known contained leafy substances and sticky dressings in dishes on ice beneath those glass shields that are meant to keep germs out. Given the fact that I follow the health care industry pretty closely and understand that human beings shed skin like dogs shed fur, I am not a salad-bar kind of guy.

And, sure enough, I decided that by the look of it these particular glass shields actually kept the germs in. I decided the parking lot was more sanitary than the salad bar. So we did not order the salad bar, but we did ask for nachos.

The nachos contained more salt than I have eaten in the last seven years, and the so-called melted cheese did not appear to be cheese at all, but, rather, a cheese-like substance with the consistency of Ranch salad dressing, dripping over hot pepper-like spices that force immediate beverage consumption.

All of which quickly generates second rounds of soft drinks, of course, which is the point of all that salt and all those spices.

When the actual dinner food arrived, it was only modestly less disappointing than the nachos. My daughter’s chicken tenders were about as generic as they come. My own grilled chicken salad contained chicken that tasted about as firm and tasty as a rotten peach.

We didn’t stick around for dessert, which, I imagine, would have been some thawed out piece of heavy chocolate cake-like material, and coffee made out of whatever grounds they saved from the morning shift.

The wonder is that all these “casual dining” concepts—Ruby Tuesday and Chile’s et al, do as much business as they do.

I went to a P.F. Chang’s a year ago, and while the place was packed and the bar was doing land office business, the food was worse than our local Panda Pavilion. And the normal “morning after” reaction to all that MSG and oil and days-old cold-noodle-with-sesame, if you get my drift, occurred almost as soon as I paid the check.

Next summer, if Claire still wants to be seen in public with her old man, I’m taking her to The Cheesecake Factory.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Tuesday, July 26, 2005

The eToys of the Real Estate Market

I’m not which headline is more interesting:

Oil Profits May Be Peaking


Existing-Home Sales Rise 2.7%, Paced by Demand for Condos.

Both appear in today’s WSJ, and both are worth noting—the former because of its potential to be viewed as a wrong-way kind of complacency indicator; the latter because it reveals the seeds of the eventual real estate glut which are now being sown.

I’ll go with the condo story.

Here’s a piece of it:

Sales rose for all types of homes in all regions of the U.S., reports the WSJ, but the star performers were condos and cooperatives, where the sales pace has been running twice as fast as for single-family homes.

During the second quarter, condo sales were up about 37% on an annualized basis, compared with 22% for single-family homes.

The reason I find this especially interesting is 1) experience, and 2) what I’m hearing lately.

My experience with condominiums is that they are the eToys of the real estate business. You all remember eToys—the online toy merchant that came public in a burst of enthusiasm…and not too long afterwards hit the trees, as a friend of mine likes to say, with no flaps down.

Like all the other speculative, me-too dot-coms that were dreamed up, funded and brought public in the wake of Amazon’s spectacular success, eToys fulfilled a need: the need for investors who missed the early opportunity to invest with legitimate ground-breaking businesses to buy something—anything—that got them into the game.

And condos are like that, too: when housing gets tight, and real estate gets hot, investors look to condos to make some dough.

After all, they don’t require much effort, given that any condo in any development is pretty much the same as any other condo in that development. The school system, the distance to town, the neighborhood, the yard, the landscaping, the driveway, the roof, the gutters, the shingles, the wiring, the pipes, the basement—none of that stuff particularly matters.

After all, you're not going to own it forever. You might live there a few years until you get enough vig for a real house; more likely you're going to rent it to out and sell it a few years later to some greater fool.

Condos were the last part of the east coast real estate market to spike in the bull market of the mid-to-late 1980’s, and they seemed like such a no-brainer that my church bought a condo for an associate minister—the theory being that when the minister moved on, we owned an appreciating asset that could be used to fund great things.

But the condo did not appreciate. It did not even hold its value. And the equity got wiped out about as quickly as eToys stock. We were, it turned out, the greater fools...and when a church loses money, it hurts.

As for what I am hearing right now, let’s go back to that WSJ story:

Condo sales are strong nationwide and have reached frenzied levels in Miami, Las Vegas and San Diego.

And that's interesting because of what I am hearing.

What I am hearing is that housing sales have hit a wall in Vegas, with certain developers offering cars to buyers of newly built McMansions. The reason? There are something like 100 condo projects in Las Vegas, and condo-mania is siphoning the speculative—er, "investment"—buyers out of the housing market.

Hence, a sudden glut of McMansions blooming in the desert.

Whether that glut is real or just a mirage on an otherwise tranquil horizon remains to be proven.

Informed observations are welcome.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Monday, July 25, 2005

Around The World in 80 Minutes

Oil service pioneer Schlumberger—for all the anti-French wisecracking that goes on these days (e.g. “France just raised its terror alert...from ‘Run’ to ‘Hide’”)—is one of the world-class acts of public companies, and has been almost since its founding back in 1912.

That’s right: in 1912—when armies still moved on horse-back—Conrad Schlumberger conceived of using electrical impulses to map rock formations below ground.

And this wasn’t some snooty France-only deal. Conrad and his brother began doing geophysical surveys in Romania, Serbia, Canada, the Union of South Africa, the then-Belgian Congo and the United States in 1923.

In fact, Schlumberger is probably the most international company I have ever come across in 25 years of doing this, and therefore one of the most interesting.

So a Schlumberger conference call is always worth a listen, if for nothing else than its ability to take you around-the-world-in-80-minutes.

But with the world in what feels like unusual flux, from Iraq to Russia to China to Venezuela and places in-between, the Schlumberger call takes on an especially value-added hue—and last week’s did not disappoint.

Rather than summarize the call in my “rambling and sarcastic” manner (thank you Business Week!), however, I am presenting here the most interesting, unvarnished dialogue from last week’s earnings call—with questions from Wall Street’s Finest and answers provided by ace Schlumberger Chairman and CEO Andrew Gould.

It needs no elaboration, although I have italicized the more potent comments.

Q: In the quarter here, you've posted over 40% incremental margins both looking at it year-over-year and sequentially for the oilfield. Given all that you see right now, do you believe that those kind of incremental margins are sustainable and for how long?

A: Let me put it this way, Geoff. I think that we still have considerable pricing power. I also think that we're starting to see considerable inflation in the system and it's a question of which one is going to go faster.

Q: Can you elaborate a little bit on the inflation comment and where you see that?

A: Not only in materials but even more importantly we're seeing it in the cost of labor now.

Q: And are you taking any new actions in regards to labor in—where you're getting labor from or anything else that—?

A: No, our problem is retention. Our problem is not getting it. Our problem is people poaching our labor.

So we have put certain retention mechanisms in place. We have had a general salary adjustment fairly recently, so you know, we have to get that back in pricing.

Q: I wonder….whether or not the slowing in oil demand growth in China is a concern to you or not?

A: The demand thing doesn't worry me particularly, because you know, everyone is focusing on the IEA's [International Energy Agency] demand remarks in the last week or two.

No one seems to have focused on the supplier, and what is really interesting is if you look at the supply numbers for the first half year, the non-OPEC supply is about 1.2 million barrels a day below what the IEA currently has in their forecasts.

So you know, I don't think there is a significant elasticity being developed in supply demand for it to significantly affect the price.

Q: And a quick follow-up. Russian production growth has slowed dramatically.

A: Yes.

Q: Given that Schlumberger has more visibility into Russia than anybody, I was wondering if you could add some more color…?

A: We’ve always said that there are two factors playing. One is that we are moving towards the end of the period when it was easy to access the existing well stock that was drilled in the Soviet era, and to work that over and to produce more. Still possible—but a lot more difficult than it was three or four years ago.

And the second thing is…that people are reluctant to invest more.

Q: And Iraq? Any update…?

A: The last assessment was still that it was too dangerous for us to do anything.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, July 22, 2005

When 11 of 56 Leading Economists Agree, Part II

Well, they’re hiring in the valley.

Silicon Valley, that is. And it’s not just Google. Even Cisco, after a few years of keeping a tight leash on new hires, is out there competing for talent.

And it is getting competitive—“like 1998,” according to one friend with a history in the technology business, frustrated after losing a recent battle over a good new candidate.

Another friend—a mid-level engineer at a brand-name semiconductor company—is ready to bolt for an offer on the table if he’s not happy with his performance review this week. What would make him happy with his performance review this week? A big raise would make him happy.

I’m no economist, but that’s called wage inflation—something we weren’t supposed to get until the “labor arbitrage” with China was finished, which until yesterday’s move in the bond market apparently wasn’t going to happen for the next 10 to 30 years.

In fact, after yesterday’s revaluation in America’s Cost of Goods Sold—by which I mean the Chinese Yuan—our yield curve might start looking like the UK.

By which I mean inverted.

So whoever is buying those pools of “alluring and controversial mortgages that require unusually slim payments for a few years, before bigger sums fall due” from the likes of Ben Ray III (see “When 11 of 56 Leading Economists Agree, Something’s Wrong” below) might want to start checking those “low documentation” mortgages a little more carefully.

And make sure Billy Bob really does work down 't the Stuckey’s, like he tol' Ben Ray III.

Jeff Matthews
I Am Not Making This Up

Wednesday, July 20, 2005

When 11 of 56 Leading Economists Agree, Something’s Wrong

A Mortgage Salesman’s Pitch

If you read one article in one newspaper all day, make it that one, by the excellent George Anders.

It’s hard to miss, being on the front page of the Wall Street Journal—although with all the earnings reports and the Yahoo-head-scratching going on, you might easily pass it up, thinking to yourself, “ho-hum, another real estate bubble story.”

But this one is the real deal.

It details in startling, awe-inspiring detail the workload of one Ben Ray III, a Northern California mortgage lender whose bread-and-butter is supplying “alluring and controversial mortgages that require unusually slim payments for a few years, before bigger sums fall due.” And there is so much over-the-top stuff packed into this article it’ll make your head hurt.

It’s kind of like the dinner I had last night here in San Francisco with some old, special pals—everything was good.

And if you think the bottom of the available-pool-of-buyers has been scraped, wait til you get to the part about the latest twist in mortgage lending.

No, I’m not talking about adjustable-rate mortgages—everybody, including my dog Lucy, knows about all the ARMs being sold. And I’m not talking about interest-only mortgages—the commotion over which has probably reached my cat Marvin, it’s so overblown. I’m not even talking about the so-called “Freedom Loan” ol’ Ben pushes—called the “Prison Loan” by his competitors.

I’m talking about “low documentation” loans:

“…including ones where lenders simply take borrowers' word about their income and don't ask for pay stubs.”

Now, the reason this “low documentation” idea rings a bell with me is because of a story I heard a few weeks ago from the straight-laced guys at Northern Trust, which handles a lot of family trust accounts.

Business is off-the-charts good at “The Northern” thanks to the bank consolidations in which faceless behemoths try to generate “synergies” by replacing “human beings” with “call centers” and “1-800 Numbers” and “ATM Machines,” causing old-line families who want to talk to a “human being” about a minor issue like, say, their inheritance—and can’t get past the recorded message—to pack up their money and move it to a bank stocked with “human beings.”

And one of the stories they told was of a family with several hundred million in assets that had done business with a bank for over 200 years—and couldn’t get a $4 million loan from the bank. So the family took their several hundred million to The Northern where they could actually discuss things without pressing “1” on the touch-tone keypad.

Thus, it has come to this: a family with several hundred million in assets and a 200-year credit history has a hard time borrowing from their family bank—but thanks to folks like Ben Ray III, Billy Bob can now get hisself a house without even digging out his Stuckey's pay stub from beneath the cushions of the couch he is paying through the nose for from the local Rent-A-Center.

No, I am not dumping on the Billy Bobs of the word. I do not think housing should be restricted to wealthy white families that bank at The Northern, and I particularly despise the inequities in lending costs between those wealthy white families that bank at The Northern and the Billy Bobs who get their pockets picked clean at the Rent-A-Center, a stock I would never own, placing it as I do on a par with tobacco companies.

But this is what it’s come to: low documentation lending. And there is much, much more in this excellent George Anders article. You really ought to read it start to finish.

The question this article raises, however—at least in my mind—is not how widespread these practices have become and whether low documentation loans signal The Top in the real estate mania. The question it raises is this: what is wrong with the real-estate-bubble-must-crash scenario?

I ask that question because of the following throwaway line in the story:

In a recent Wall Street Journal survey of 56 leading economists, 11 named a possible housing bust as their biggest worry for the economy.

We all know that anything widely anticipated—especially by 11 leading economists—will not happen the way those 11 leading economists expect.

Back in 1987, for example, it was generally accepted that stocks in Japan were highly overvalued—much like the dot-coms in 1999, and very much like real estate here today—and that if there was going to be a stock market crash it would start in Japan.

But the crash of 1987 did not start in Japan: it started in America, and it was triggered by a little-remembered device called “portfolio insurance.” I will deal with this device another day, but the gist of “portfolio insurance” was this: you sell when stocks are going down. Which is exactly what happened.

Thus, the Crash-That-Didn’t-Start-In-Japan came to mind when reading about Ben Ray III and the “low documentation” loans and all the other rotten loans that will surely come to grief.

And it causes me to wonder: what’s going to make those 11 leading economists wrong about the real estate bubble?

Jeff Matthews
I Am Not Making This Up

Tuesday, July 19, 2005

IBM Delivers The Goods?

IBM delivered the goods with strong 2Q operating results…

Thus begins the Merrill Lynch message on last night’s second quarter earnings report from Big Blue, in which net income grew all of 5.4%

Revenue growth ex-PCs was 6%...

Actually, 2% of it came from currency, so the real revenue growth was 4%, but who am I to correct Merrill Lynch?

With operating EPS of $1.12 versus our $1.05 estimate…

For the record, this so-called “operating EPS” excludes a $1.7 billion restructuring charge related to elimination of 14,500 employees, which amounts to $1.06 per share. Is it really a heroic feat to “beat the number” by seven pennies, with one hundred and six brand new non-cash pennies floating around the balance sheet?

Of course, an IBM quarter isn’t really a quarter without a restructuring charge, so the appearance of $1.7 billion in charges was so unremarkable that Wall Street’s Finest barely remarked on it.

This is, after all, the same IBM which has taken $4.6 billion in “non-operating” charges in the last four years. So good is IBM at managing “non-operating” charges that, in one of the amazing accounting coincidences of all-time, this quarter’s $1.7 billion restructuring charge was almost exactly offset by $1.9 billion in non-recurring gains from the recent settlement with Microsoft and the sale of the PC business.

Who knows what future earnings potential lurks in $1.7 billion worth of “restructuring charge”?

But, getting on with the news that excited Wall Street the most:

Services bookings and profits sharply improved. Services bookings soared to $14.6 billion…

“Soared” is, in fact, an appropriate verb, since the services bookings were 45% higher than the year ago quarter. Unfortunately, bookings are still down 12% for the trailing twelve months.

Furthermore, the question arises as to how exactly did this company magically turn around a multi-billion dollar, people-intensive business in a mere 90 days? Accenture provided the answer when, on that company’s recent conference call, management spoke of IBM’s “aggressive behavior” in pricing new deals by saying “at any point in time” people act in such a way that “you scratch your head…”

And low and behold, the aggressive behavior may have consequences down the road:

[IBM] management also indicated that margins would be compressed in early years for some new contracts, as IBM is giving clients more savings upfront (i.e. lower pricing) with the intent of making up for this on the back end through better efficiencies down the road.

Nevertheless, despite the aggressive pricing,

… pretax margin rose with better consultant utilization.

When 14,500 people leave a company, the utilization of the remaining employees does tend to rise.

All in all, it was a typical IBM recovery from a weak quarter: mediocre sales growth, middle-of-the-S&P-pack net income growth and per-share earnings boosted by share buybacks, plus a big fat restructuring charge to help future earnings…and it was enough to bring a sigh of relief from Wall Street’s Finest.

IBM’s CEO said in the press release that IBM had “returned to form” this quarter after the first quarter’s poorly-received results.

With a $1.7 billion cookie jar—er, restructuring charge—safely tucked into the balance sheet; a rejuvenated backlog in the services sector purchased (according to even its most ardent fans) with up-front discounts not to be reckoned with for years to come; yet another lagging business (personal computers) abandoned to better competitors, and Wall Street’s Finest back on the sidelines, pom-poms waving, Big Blue is indeed “back in form.”

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Monday, July 18, 2005

Memo to Kodak Shareholders: George Steinbrenner He is Not

Word flew around Wall Street last week that Hewlett-Packard was getting ready to buy Eastman Kodak.

This rumor—that a cash-rich-but-feeble company is going to buy an aging, used-to-be-something business seems to pop up about as frequently as news that the cash-rich-but-feeble Yankees have acquired yet another aging, used-to-be-something pitcher.

(Sure enough, three days later the Yankees bought the aging Al Leiter, who, for what it’s worth, used to be the young Al Leiter, before the Yankees traded him for Jesse Barfield in the kind of panicky deal that left the Yankees high and dry in the World Series-less 1980s and which brought A-Rod and a host of hitters-on-their-last-legs to the team in the 2000s, thus ensuring another World Series-less decade for the decrepit franchise. Not that I care about the Yankees.)

But getting back to the latest HP-for-Kodak rumor: the odd part of last week’s incarnation was that this time around, for some reason, people seemed to actually believe it: Kodak stock popped two bucks immediately—enough for a half-billion dollars worth of incremental market value—and never looked back the rest of the week.

Bizarrely, a half-billion dollars is roughly the amount of annual “non-recurring” charges the perennially restructuring Kodak has taken in each of the last four years…and for which the company is on track in 2005. (Kodak is one of the few companies left that takes recurring-non-recurring charges without any embarrassment whatsoever.)

So Wall Street’s traders, by valuing the rumor at roughly the amount of Kodak’s annualized, recurring-non-recurring charges, have apparently discovered an entirely different metric for discerning takeover value than most investment professionals, who tend to look at recurring cash flow and hidden assets when trying to assess undervaluation in the marketplace.

But it wasn’t just the traders who took the rumor seriously: at least one Wall Street firm felt compelled to put out an analysis of just what it would take for HP to buy Kodak. To that firm’s credit, the answer was “too much.”

And I am here to report to hopeful, “thank God I’m finally getting bailed out” Kodak shareholders as well as anxious, “I’ve seen this movie before and it ends badly” Hewlett-Packard investors, that the deal is not going to happen.

For starters, there are the three main obstacles HP’s new CEO would have when attempting to push the acquisition of an aging, market-share-losing technology-based company past the HP board of directors, and they are:

1. Compaq.

2. Compaq.

3. Compaq.

Secondly, what traders and hopeful Kodak investors don’t realize is this: Kodak has been trying to sell itself to HP for years—going back to the George Fisher days (Fisher was the ex-Motorola genius who blew into Kodak with high hopes and retired five years ago, with a whisper—not a bang.)

That’s right. Anybody with an ear to the ground in the Palo Alto area has heard about Fisher’s approach to HP towards the end of his disappointing tenure in Rochester in the late 1990s—an approach that fell flat and hasn’t gained any elevation since.

So, if anybody out there has Kodak shares burning a hole in their portfolio, I would suggest you not to expect the deal-shy folks in Palo Alto to relieve you of your burden.

Because, unfortunately for Kodak investors, the CEO of HP is now Mark Hurd, the ex-NCR turnaround guru and a smart, rational man dis-inclined to making panicky, overpriced acquisitions.

George Steinbrenner, he is not.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, July 15, 2005

“Worldwide Spiraling”

It’s good to know inflation is tame—at least, that’s what anybody buying ten-year bonds with a 4.20 yield are telling us.

But that’s not what Royal Dutch/Shell is telling us, according to today’s WSJ:

“Shell said costs in the second phase of the massive Sakhalin II natural-gas project…may double to $20 billion, and it expects the project to be delayed by half a year.”

The Sakhalin II project is a huge Liquified Natural Gas development off Sakhalin Island near Japan, designed to supply “the growing economies of Southeast Asia,” as described on the Sakhalin web site.

According to the folks at Shell, the sudden, overnight increase of $10 billion in the cost of this project owes itself partly to Sakhalin-specific issues, including environmental costs and pipeline-laying complications; and partly to “a world-wide spiraling of commodity and project costs,” as per the WSJ.

“We do not see these pressures decreasing in the near to midterm,” the Shell CFO told listeners on a hastily-organized conference call.

Just last week, in “But They Won’t Drill With It...Not For Now, Anyway,” I wrote about the fact that despite the doubling in oil prices this past year and the resulting massive increase in cash flows to the major oil companies, those same oil companies maintained cautious drilling plans—preferring to return much of the spare cash flow to shareholders via hefty dividends and share repurchases.

Looks like there’s going to be at least $10 billion less spare cash flow—either for returning to shareholders or for the drilling and exploration that the world is going to need to avoid another energy crunch.

Could be a long, cold winter for the bond market.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Thursday, July 14, 2005

How Screwed Up Is Microsoft?

A funny thing turned up in my “Junk E-mail” box at my Microsoft Hotmail account last night.

It was an email to myself, from my own Microsoft Hotmail account—one of those automatic reminders you set up in the Hotmail calendar to notify you with an email when a meeting is coming up.

That’s right—Microsoft diverted its own email into the “Junk E-mail” box, along with emails from people with all kinds of wonderful free offers for me, including “Mariah” and “” and “Tammy” and “GET-GREAT-CREDIT.”

I suppose you could look at this absurd situation two ways:

1. It’s yet another example of how clueless Microsoft has become regarding the mediocre technology it’s fobbed onto the rest of the world over the years.


2. Microsoft has finally gotten its act together, now that one of its software products has demonstrated the capability of identifying Microsoft’s own products as junk.

Your choice.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Wednesday, July 13, 2005

Don't Shoot Me, I'm Only The Messenger

Have you ever run a business? You're grading these projects in less than 12 months. You expect instant blockbuster success, that seems a little rediculous to me. Most successful businesses and projects are not overnight successes, they take time. You gotta be more realistic and objective before you start throwin the tomatoes in my opinion.

Thus writes a reader in response to yesterday’s “Overstock Cruises in With a Cool 14”—in which I noted the flat-lining of’s “Build Your Own Jewelry” site as well as the failure of the auction site to attract much in the way of actual paying bidders, despite what appears to be a whole lotta listings going on.

It’s a worthwhile point to make: most of us Wall Street types have never run an actual business, let alone coped with the day to day stress of working for a start-up with no customers, no revenues, and no idea what tomorrow will bring.

But, for starters, I have in fact run a business...for twelve years. And more importantly, I’m not the one who expected “instant blockbuster success” for anything Patrick M. Byrne had something to do with.

Personally—and I say this with complete candor—I expect very little from whatever businesses Patrick M. Byrne initiates, because I don’t believe 1/10th of what he says. And for that reason I certainly never expected “instant blockbuster success” of any kind from Project Ocean or Project Propeller, Build Your Own Jewelry or Worldstock...earnest and well-meaning and high-minded as those efforts might be.

That’s my own personal point of view, and it may not be shared by anybody else on the planet, which is fine. (It also has nothing to do with the valuation of shares, about which I have never ventured an opinion here, positively or negatively, because valuation is inherently subjective; and what we’re talking about here are demonstrable, quantifiable facts.)

The one who might be blamed for raising expectations of “instant blockbuster success” is Patrick M. Byrne himself, who wrote the following words during last fall’s launch of Overstock’s auction site:

9/30/04: just giving an idea of how fast this is taking off...since our launch last Friday: …Sometime around 5 A.M. this morning we passed the mark of 4,000 auctions. 66% of completed auctions are clearing (I think eBay is 44%?)

Three weeks later, Byrne again compared his site to eBay:

10/22/04: It's-- so far, my belief is, it's far faster growth than eBay saw in their first 15 days or 20 days.

And three months on, Byrne was still claiming great things for Overstock Auctions, including a “closing rate” which, for any online auction site, would confer the kind of “blockbuster success” Wall Street seemed to expect from Overstock:

1/28/05: [Our auction conversion rate is back] to the 35 to 40 range…. They [eBay] say that they have a closing rate in the 40s…. But if you remember they count it differently than us. …I wouldn't say we are higher than them but…

Believe me: I never expected “instant blockbuster success” for Overstock auctions. The man who raised the great expectations on Wall Street was Patrick M. Byrne.

Which brings us to Mr. Byrne’s latest public utterings in yesterday’s press release explaining the reason for the delay of Overstock’s second quarter earnings: President Patrick Byrne said: "Please excuse the schedule change. I understand that this is an inconvenience for those who follow Overstock. The fact is, however, that in July we are completing our Oracle and Teradata system installations, integrating our recent Ski West acquisition, and relocating our corporate headquarters: thus, we simply need some additional time to complete our quarterly financial closing process."

Now, we know Teradata’s Phase #1 completion date was expected to be last month, or at least that’s what Patrick wrote to shareholders in the first quarter letter:

Teradata -- Data warehouse noted above. Expected Phase #1 completion: June.

And the Oracle “system installations” were expected to be completed in May-June, or at least that’s what Patrick wrote to shareholders in the first quarter letter:

Oracle 10g -- Our auction site runs on Oracle 10g. We will roll our B2C site from Oracle 9i to 10g. Expected benefit: faster recovery times and ability to hook disparate computers into one "grid" cluster. Expected completion: May - June.

It is now July 13.

One other thing. Back on April 22, Patrick wrote to his shareholders, "In June we will move from our current space to a much larger building being completed a few hundred yards away." Yesterday, July 12th, he blamed part of the earnings delay on "relocating the corporate headquarters."

Looks like a few more great expectations in the rich tapestry of are unraveling. But don't shoot me, I'm only the messenger.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Tuesday, July 12, 2005

Overstock Cruises in With a Cool 14

My high school French teacher was a hip young guy, kind of scruffy, who related more to us freshman than he did to the other teachers in school. He seemed especially fond of Billy, the class member who—this was a point in time when Led Zeppelin and Alice Cooper were the biggest bands in my school—was a Dead Head.

Billy was not, as they say, always entirely with us even when he was with us—if you catch my drift.

In any event, I couldn’t tell you a thing the French teacher taught us that year, but I do remember very vividly the day he gave us our grade point average just prior to going into final exams.

He did it in front of the whole class—sitting on his desk and reading our approximate GPA out loud from a sheet of paper. He read the list slowly and with great relish, especially when he got to the various knuckleheads among us. I think his point was to let the laggards know how well we had to do on the final in order to pass.

The girls, of course, were all fine—80’s and 90’s and all that. The boys’ grades had a much higher standard deviation, as it were: mostly 70's and low-80's, with a couple of 60s in there. Then he got to the Dead Head:

“And Billy’s cruising in with a cooooooool 20,” is how he put it. Everybody laughed, including Billy.

I think of Billy when I look at the “Build Your Own Jewelry” site and monitor the diamond sales.

You remember “Build Your Own Jewelry”—the web site that was going to “dominate” the $2,500 to $5,000 engagement ring market, according to blustery Overstock CEO Patrick Byrne.

And, of course, you recall the $7.5 million diamond “steal of a lifetime” Patrick made to stock the site on the spur of the moment in late 2004 with some unidentified partners in an off-balance sheet vehicle established months prior to the sudden transaction with desperate diamond sellers who apparently didn’t know the value of their satchel of stones…which he could “flip” for an immediate $1 million profit or “dribble out” via the web site for a $3 million profit...

Well, the dribbling is not happening, according to my monitoring of

Since the 38 diamonds disappeared en masse the first week of April (see “The Mystery of the 38 Diamonds” on this blog), out of nearly 2,800 stones available to all comers on the “Build Your Own Jewelry” site, a cooooooooool 14 stones dribbled out during the remainder of the second quarter.

And only 3 of those 14 were priced above $2,500—the price point at which Overstock was going to begin its “domination” of the online jewelry business.

No doubt in the upcoming second quarter conference call, Patrick will shine the spotlight on something besides “Build Your Own Jewelry.” I have no idea what, because the auction site is not happening, and the company was barely mentioned in last month's Wall Street Journal article on eBay's problems (Amazon ranked more highly as an eBay competitor)...but diverting attention away from the losers is Patrick’s standard M.O. and it seems to work well with Wall Street’s Finest.

For unlike my French teacher, who publicly shared the failings of poor Billy, the Dead-Head underachiever, with the rest of his classmates, there’s apparently nobody willing to discuss Patrick’s failing grades in front of the class.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Monday, July 11, 2005

So How Far Does This Google Thing Go?

I suppose you can make a case that Google is a low value-add search provider ready to get its clock cleaned when Microsoft wakes up and does whatever it wants to do to wipe Google off the map.

Personally, I’m not sure how Microsoft will ever get its act together, given an operating system under perpetual virus attack, and a founder who spends two weeks a year sitting by a lake in a cabin Thinking Big Thoughts About Technology (see "Bill's Hideaway" from March 28, 2005) while anonymous engineers in Mountain View are dreaming up slick and useful new technology like Google Maps.

Besides, as I have pointed out here before, Microsoft’s M.O. is to give away something—like a database or a spreadsheet or a web browser—along with its operating system in order to undercut the Borlands and Lotuses and Netscapes of the world. But, since Google doesn’t charge the user for search, Microsoft can’t undercut free.

Yahoo, meanwhile, appears to want to be the Warner Brothers of the web—owning and charging for content—which makes sense given its CEO’s previous gig at Warner Brothers.

I’d argue Google could eventually displace Microsoft as the most important, and profitable, technology-based company.

Before you spit out your coffee at that, consider this: it took Microsoft 15 years from inception to reach $1 billion in sales. It took Google 5. And it took Microsoft 18 years to reach $3 billion in sales; Google 8.

Unlike the early internet companies during the dot-com boom that generated fake sales via non-cash swapping of services, Google’s business is cash-based, quit
e real, and being taken from newspaper, radio and television advertising media of all stripes.

For example, in the first quarter of 2005, Google's revenues hit $1.256 billion, versus $249 million the same quarter of 2003. Meanwhile, at the New York Times, revenues in the like period jumped a non-whopping $21 million, from $784 million to $805 million.

For Dow Jones, the increase during the same period of time was a modest $54 million, including acquisitions.

The thing I admire most about Google is that everything the company does is intended to drive more traffic on its highway. That single-mindedness—which is perceived as a weakness by skeptics of Google’s business model—is, in my opinion, management’s best quality.

It reminds me of Wal-Mart, which has one mission in its corporate life: to get customers into the stores. And it leads me to believe Google will succeed in fending off perceived threats to its dominant position, whether from the Evil Empire in Redmond or the Yahooligans in Sunnyvale.

One group that poses no threat to Google are the Overstockians based in Salt Lake City, and tomorr
ow we will see how many of those steal-of-a-lifetime diamonds Patrick and the crew sold this quarter.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, July 08, 2005

Summer Reading: “Eisner” Without the “D”

It’s summer—time for only the fabbest of the media big-wigs to zip into swanky Sun Valley on their G5s for Herb Allen’s annual Sun Valley media confab and mogulize together (can you tell I’ve been reading about it in the New York Post)?

Allen’s gathering is where the media elite gather to kibitz, huddle, and otherwise engage in serious discussion about mergers, acquisitions and deals, and it makes great fodder for the Post, my newspaper of record—insofar as the business section, sports pages, police blotter and Page Six are concerned.

Anyway, Allen’s retreat happens to be where, precisely 10 years ago, Disney’s Michael Eisner initiated the idea of buying Capital Cities/ABC with Capital Cities/ABC chief Tom Murphy and longtime Capital Cities investor Warren Buffett.

Buffett, who knew a hooked fish when he saw one, reeled Eisner in like one of those guys on the Saturday morning bass fishing shows…but you can read the details for yourself, and more, in James Stewart’s excellent book, “Disney War,” which came out earlier this year.

If you haven’t read it cover to cover, I suggest you take your copy to the beach this summer.

A reader can open this well-researched, 572-page look at the final days of Michael Eisner’s Machiavellian reign of terror over the media franchise Walt Built, to almost any page and find a hair-raising example of deceit and duplicity by Eisner that would make any politician proud.

To prove the point, I’ll do exactly that, right here, and open the book to random pages:

Page 244: Eisner upset after Ovitz wishes Sid Bass a happy New Year.

Eisner was upset that Ovitz [Michael Ovitz, the man Eisner had hired to run Disney] had wished Sid Bass [the major Disney investor who brought in Eisner to lead the turnaround] a happy New Year. “I really must know what you’re up to. It’s not enough that you have your secretary call to say that you wished Sid Bass a happy New Year. Hearing from a secretary…puts me in a dark position.”

Page 325 Eisner warns attorney, from the stand, not to pry.

Fields [an attorney questioning Eisner] continued: “Did you tell Mr. Schwartz [author of Eisner autobiography] that you hated Mr. Katzenberg?...You said ‘I think I hate the little midget’?”

Eisner looked uncomfortable. “I think you’re getting into an area…that is ill-advised,” he warned.

Page 453 Eisner presses latest board victim for comp tables.

The price for a table [at the opening premier of the Wall Disney Music Center Concert Hall] was high—$25,000 to more than $100,000 for tickets that included all three gala events. Despite his recent disparagement of her performance on the [Disney] board [Eisner was engineering the ouster of Andrea Van de Kamp, chairwoman of the Disney Music Center, for disloyalty to Eisner], Eisner called Van de Kamp to complain that he didn’t see why he had to pay for a table when he had been responsible for a $25 million gift [from the company].

Page 121 Eisner delights in Katzenberg mortification.

Then Eisner took the stage to announce that “I decided today to build a new animation studio on the lot.”…Wild cheering broke out among the animators. They were jubilant. Just a few years ago they’d feared for their jobs. Now they would be returning in triumph from their exile in Glendale….

Katzenberg [Jeffrey Katzenberg, who revived Disney’s animation studios and was therefore largely responsible for Disney’s revival under Eisner] looked stunned and angry. It was obvious to all that Eisner had told him nothing of any plans for a new building….The mood was euphoric at the party afterward at the Sheraton hotel.

The Eisners and the Disneys had not stayed for the screening but left early to have dinner together…leaving Kateznberg behind. During the meal, Eisner gloated over how he’d upstaged Katzenberg with the announcement…

Here’s the CEO of a multi-billion dollar company monitoring his number two guy’s holiday greetings; warning a lawyer in court to back off; trying to get comp tickets from a lady he is, through the most underhanded tactics, squeezing off his board of directors; and undercutting the man who had done the most of anyone to revive the Disney film franchise.

And those were only four pages out of 572! Makes you think, if Eisner had been Catholic back in the 1500’s, he could have been Pope, what with all the poisoning and usurpation and intrigue.

Of course, Eisner’s power derived not merely from manipulating individuals: it derived from the tremendous value he had help create for Disney shareholders in the first decade of his tenure, taking a stodgy, Hollywood has-been and making it a major media company.

But the key to his ability to retain that power was knowledge. Eisner insisted at all times of knowing who was saying what to board members and key executives—even, and perhaps especially, the petty stuff. And by understanding the flow of information, he could control it.

And that is how things really work in companies like Disney. It has almost nothing to do with formal structure; it has everything to do with personality, and ego, and drive—and knowledge.

Some points in the book, which came out earlier this year, have been widely covered, particularly the Michael Ovitz disaster—thanks to the lawsuit that put inflammatory remarks like “the little midget” in the newspapers.

But the best stuff here is about the internal workings within Disney, and how Eisner kept his position by manipulating the board. By the end of his reign, Eisner had created such a dysfunctional world that it resembled pretty much any family on HBO.

When Disney hired a management consultant to interview top executives in-depth about how the senior management worked together, “some were less than candid, because they didn’t trust the consultant, who they suspected would be reporting everything to Eisner. Others revealed as little as possible…and some were honest: no one trusted anyone else, least of all Eisner…”

The consultant summed up the results by telling Eisner, “you guys are not a good team. You’re not a team at all. You’re not even a group.”

Eisner’s response: “How can you say that? You haven’t been to my Monday lunches.”

But perhaps the scariest insight into Eisner—scary given that he still runs Disney—comes from Eisner’s attempt to find some sort of family legacy linking Eisner’s own name to the Disney name:

After some more conversation, and just before we leave for dinner, Eisner gets a pen and a piece of paper. “Disney is a French name, not Irish,” he reminds me. “Now look at this.” He writes “D’Isner,” “Deez-nay” as the French would pronounce it, “is Eisner without the D.”

As Stewart writes in a footnote to that story:

For the record, Roy Disney notes that the ancestral family name is “d’Isigny,” after the French village, which is not an anagram of Eisner.

For summer reading, I'd have to say that "Disney Wars" is almost as scary as "Jaws" but more entertaining.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Thursday, July 07, 2005

It Can Happen Anywhere

The aftermath of the London bombings is unfolding at this moment.

What comes to mind are some observations from my April visit to London, the first in many years (I lived in Europe when I was a kid, and my parents lived in London during the 1980s). I went there to conduct business and see the Cream reunion concert.

Okay, I actually went there to see the Cream reunion concert, and to conduct business. Either way, I did spend five days in London—taking the subway all over the city, including the new financial district in Canary Wharf; taking the train out of town to visit one of our companys' major facilities; and spending a lot of time walking, talking, eating and looking.

And in retrospect, I do not recall a large police presence in London—at least a New York City-type police presence.

I did notice an odd absence of public waste baskets on the streets and in the subway and train stations there. Unlike New York, where every street-corner has some kind of trash receptacle, in London you can not throw out something unless you walk into a Starbucks and use the waste basket where they keep the napkins and lids.

It’s very weird at first—but something you get used to once it’s explained that the IRA used to use the receptacles for bombs.

As a result, people throw out gum, beer and soda cans, water bottles, napkins and all manner of trash in weird public places—on stairs, in niches of a brick wall, on ledges. It reminded me of the old Monty Python ‘Society of Putting Things on Top of Other Things.’

More importantly, there were very few cops on the streets of London—again, unlike New York.

In New York City, you get off the subway or the train, and there’s a cop standing around on the platform, another bunch standing around inside the station, and two more on the sidewalk outside the station—they’re all over the place. Granted, they’re not all battle-hardened warriors, but, as Rudy Giuliani figured out before anyone else, nothing creates a better sense of security than the presence of cops.

In London, I saw uniformed policemen mostly in the tube stations (although not nearly in New York City-type numbers), and that was about it.

Of course, the presence of cops on the streets and in the subways of New York did not stop terrorists from flying planes into the World Trade Center, and who’s to say that some thugs couldn’t plant bombs around the New York City subway system the way they’ve done in London.

But today’s London terrorists have had a year to plan their message for the G-8 conference, and based on my recent experience with the vast London underground, it did not take a highly sophisticated ring of experts to do what they did.

The markets in Europe are reacting to the explosions fairly dramatically this morning—a flight out of equities and into bonds; and oil getting crushed on the traders’ notion that people will fly less.

I suspect that today’s attacks will come to be remembered like the Spanish train attacks one year ago in March: a terrible event in the ongoing life of a country, and not much more than that. I also suspect that, as in Spain, those responsible will be tracked down and prosecuted—preferably, in Shakespeare's words, "not shriving time allowed."

And I would expect to see many more uniformed policemen on the streets of London next time.

Jeff Matthews
I Am Not Making This Up

Wednesday, July 06, 2005

But They Won’t Drill With It...Not For Now, Anyway

A few months back, the Goldman Sachs so-called research department upped their oil price forecast from a $28 a barrel number to a headline-grabbing “super-spike” range of “$50 to $105 per barrel.”

I wrote about it—see “The Goldman Gurus: Two Years Too Late” from April 1—in my “rambling and sarcastic” way, and my point was this: for one thing, Goldman was coming very late to the energy shortage party that had been more accurately and more profitably predicted by Marc Faber in the pages of Baron’s; and for another, the price range itself was ridiculous—being large enough to drive a Hummer through.

Naturally enough, oil prices spiked to $58 on the Goldman excitement and reversed the next day—and the reversal did not stop for seven weeks before bottoming at $47.

But you can’t keep a good raw material in shortage down, and oil is back above the Goldman-giddy levels. And will likely go higher over the next year or two or three, if the spending plans of the major oil companies are any indicator.

I have pointed out before how the U.S. majors, including Exxon Mobil Corp, remain cautious about the long term price of oil—because they do not want to get caught up in another boom-bust cycle. So they are returning much of their cash flow to shareholders rather than to the drilling companies.

Exxon Mobil, for example, generated $40 billion in cash flow last year, and spent $12 billion drilling—but paid $7 billion in dividends and spent $10 billion on share repurchases.

Now, over the July 4th weekend, comes a report from the British press that the two largest foreign oil companies, British Petroleum and Royal Dutch Shell, will “hand back $60 billion” to shareholders over the next two years in the form of share buybacks and dividends.

This amount is, according to the reports, “equivalent to Bulgaria’s gross domestic product,” which, while interesting, is a less-than-meaningful way of thinking about the money.

The meaningful way to think about that $60 billion is that it represents 6 to 12 billion barrels of crude oil that will not be found over the next two years by BP and Royal Dutch. And that is because oil exploration costs as much as $5 to $10 a barrel of reserves in large (usually deepwater) fields.

6 to 12 billion barrels of new oil that could (assuming the exploration is successful) be added to the world's supply in a two year period are nothing to sneeze at when you consider that every two years the world consumes 60 billion barrels of oil.

Meanwhile, it’s summer here in Rhode Island and the driving is heavy. The big headline in today’s Providence Journal reads: Gas prices hit record high in R.I. The sub-heading reads: But soaring prices so far have failed to reduce demand.

Seems that a gallon of regular unleaded hit $2.289 a gallon yesterday, beating the previous record set in May—just after that Goldman Sachs report and its $50 to $105 a barrel “super-spike” forecast.

The Providence Journal reports that $2.289 is not so horrible in relation to years past: adjusted for inflation, that same regular unleaded went for $2.89 a gallon 25 years ago. Which, the paper notes, explains the strong demand in the face of rising prices.

After all, the Journal says, quoting a Hofstra professor, gasoline demand is "inelastic" and requires a more sustained and dramatic price increase to influence demand.

But so long as British Petroleum and Royal Dutch, not to mention Exxon Mobil and the rest of the world’s major oil exploration companies, prefer to give surplus cash flow back to shareholders rather than spend it in the ground, we may just see oil at $100 after all.

And then we’ll see how "inelastic" the demand for gasoline becomes.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Saturday, July 02, 2005

Saturday Edition: Twelve Roads to Gettysburg

It was the shoes that started the whole thing.

142 years ago today, at this very hour, on the second day of the Battle of Gettysburg, Union troops waited in rising heat on a low hill—roughly in the formation of an upside-down “j” immediately south of town—for an attack they knew was coming from an army that had routed the same Union army two months ago to the day in the woods of Chancellorsville.

The Union troops knew the attack was coming because Confederate General Robert E. Lee had nearly destroyed them the day before—the first day of the Battle of Gettysburg—and they knew Lee would not stop with “nearly.”

The way it had all started that first day was simple and seemingly random: the morning of July 1, 1863, two divisions of Confederate infantry had marched east on the Chambersburg Turnpike towards Gettysburg, a quiet town in southern Pennsylvania known not yet for the battle that would mark the high-water mark of the Confederacy, but for its Lutheran Seminary.

Those Confederates troops were looking for shoes—specifically, a large supply of shoes rumored to be at the Gettysburg depot.

Shoes were important because armies, in those days, moved on their feet. (Some Confederate troops at Gettysburg had marched 30 miles before going straight into battle: think about walking thirty miles quickly, on an empty stomach, before doing anything let alone fighting.) And, while the Union troops were generally well supplied with blue uniforms, boots and caps thanks to the huge industrial base of the North; the Confederate troops were not so well dressed.

In fact, as many as a third of the troops Robert E. Lee marched north into Maryland and Pennsylvania that summer of 1863—with the specific intent of bringing the war home to North and inflaming anti-war passions in Congress—were barefoot.

Which is why any pictures or paintings or movies you have seen about the Civil War showing brightly uniformed blue and grey troops clashing in brave and dramatic poses, are fiction. And why the first thing the Rebel soldiers stripped from dead Union soldiers were their boots. And, in fact, why the Confederate soldiers were marching to Gettysburg on July 1, 1863.

That the decisive battle of the Civil War took place in Gettysburg owes itself to one peculiar and significant attribute of the town entirely unrelated to its Lutheran Seminary: a dozen roads from important towns and cities like Chambersburg, Baltimore and York all converged on Gettysburg, like the spokes of a wheel.

So, in late June, when Robert E. Lee halted his second invasion north of the Potomac River and ordered the scattered troops of the Army of Northern Virginia to consolidate against the sudden threat of the Army of the Potomac moving north under its new commander, George Meade, those twelve roads made Gettysburg the almost inevitable meeting ground of the two large armies.

But the initial clash that started three days of fighting was merely about the shoes coveted by the ill-clad Confederate forces—and the determination of a single Union cavalry officer, General John Buford, to make a stand against the Confederate troops from positions on McPherson Ridge and the banks of Willoughby Run just west of town.

What gets me thinking about this, aside from the significance of the dates involved, is that Shelby Foote, the Mississippi born novelist-turned-Civil War chronicler, died this week. If you have not read Foote's “The Civil War, A Narrative,” you ought to give it a try—or at least listen to the excerpt devoted to the Battle of Gettysburg, called “Stars in Their Courses,” which is read by Foote himself.

Foote chronicles a bloody, disjointed mess of a three-day battle in a way that makes it almost poetry, and brings to the surface precisely what created an entire category of individuals—and I am one of them—called “Civil War Buffs”: the human element of the war itself. Specifically, the actions and character of the men (they were all men in those days) who fought in a war where individual acts mattered greatly.

For what is really interesting about all those battles is not the blood and guts and guns of war: what is interesting—as Foote makes plain—is the clash of personalities encompassing the great struggle.

It was a war fought largely on foot. Officers still carried sabers, and the infantry charged with bayonets when the fighting got close. Airplanes, tanks, trucks had not been invented: individuals and their actions mattered as much as raw firepower.

There are too many instances during the Civil War when individual actions changed the direction of an engagement or of a battle to list here, but it is a fact that one man on the Union side saved the entire Army of the Potomac from disaster on the Battle of Gettysburg’s second day—and thus probably saved the Union.

He was Gouverneur K. Warren, and he was not even a line officer: he was Meade’s chief engineer, inspecting the geography south of the Union forces concentrated on Cemetery Hill. Warren saw that the rocky, undefended hill called “Little Round Top” (think of it as the dot on the upside-down "j") held the key to the entire Union line. If the Confederates took it (which they were about to try to do) and muscled a few rifled guns to the top, the battle was lost.

So he ordered passing troops to the top, telling their officer who hesitated at not following his original orders, “I’ll take responsibility.” The Union troops took, and held, Little Round Top by the hardest. The Army of the Potomac held its lines and fended off Pickett’s Charge the following day, and the Battle of Gettysburg went down in history as the high watermark of the Confederacy.

On Monday, July 4th, the New York Times will reprint the Declaration of Independence as it always does each July 4th. It is an extraordinary document—and one we might not be re-reading each July 4th if one individual had not made a split-second decision and taken complete responsibility for his actions 142 years ago today. Pretty cool stuff.

And all because of some shoes, and a lot of barefoot soldiers.

Jeff Matthews
I Am Not Making This Up